Why Are Gas Prices So High?

With gas prices reaching an all-time high and oil companies banking record profits, it’s easy for the public to blame oil executives for draining their wallets at the pump. Ask an economist, however, and he will give you a different answer: supply and demand.

Of course, it’s more complicated that. Undoubtedly, a number of variables impact the supply and demand of oil, including Big Oil. To eliminate any confusion, the American Petroleum Institute recently released a primer on the issue titled, “The Truth About Oil and Gasoline.” The clear and comprehensive primer runs through both the supply side and demand side, debunking a plethora of myths along the way.

One important and often overlooked point is that record profits have been accompanied by record taxes:

According to publicly available data on the top 27 energy companies tracked by the EIA, the total current income taxes paid worldwide by these companies nearly doubled between 2004 and 2006, increasing from $44.8 billion to $81.5 billion.”

Another important fact about the Big Oil is the amount of money the industry pumps back into the economy. New investment, which begets more efficient and environmentally sound energy, reached more than $183 billion in 2007, up 4% from 2006. Furthermore, less than 2% of industry stock shares are owned by company executives; the lion’s share is owned by middle class America.

Politicians will criticize oil companies for price gouging and in turn implement regulatory policies and alternative energy mandates that result in consumers paying more at the pump. If Congress has any role at all, it should be to place more emphasis on a market-oriented solutions.